Forward the Original Title‘加密货币革命：重构现代金融的融资策略’

Abstract

This paper conducts an in-depth analysis of the transformative impact of cryptocurrencies on financing strategies, with particular focus on the evolution from Initial Coin Offerings (ICOs) to airdrops and other methods. We explore the importance of tokens and elucidate the advantages of ICOs compared to traditional financing methods such as Initial Public Offerings (IPOs) and crowdfunding. Additionally, we critically assess the effectiveness of airdrops as a launch mechanism and as a tool for project development. To optimize ecosystem benefits, we propose a set of airdrop design mechanisms. Furthermore, we introduce the latest financing strategies and highlight meaningful directions for future research. By providing valuable insights and references, our paper serves as a comprehensive guide for researchers and practitioners exploring new cryptocurrency financing strategies.

1. Introduction

Cryptocurrencies, created using cryptographic technology and stored as data in virtual space, have revolutionized the financial industry in recent years (Geuer & L 2023). These decentralized digital assets operate independently of central banks, offering a new type of payment system based on blockchain technology (Jiménez et al. 2021). Cryptocurrencies, particularly Bitcoin, have significantly altered the management of transactions, investments, and wealth storage (Stein & S 2020). They offer notable advantages in transaction transparency, cost reduction, and cross-border transfer speeds, marking a paradigm shift in the financial world (Enajero & S 2021). Understanding their long-term impact is crucial. One significant impact of cryptocurrencies is their ability to facilitate successful project fundraising, bringing benefits and transformations to society (Li et al. 2019).

This paper serves as a comprehensive guide, rethinking the strategies of utilizing cryptocurrency financing in the modern financial environment, and depicting the evolution and future direction of financing. The second section explains the core value of tokens. The third section introduces ICOs and their development, including opportunities and risks, and compares them with other traditional fundraising methods. The fourth section discusses the current popular financing launch method, the airdrop mechanism. The fifth section proposes effective standards for future protocol financing using cryptocurrencies. The sixth section showcases the latest methods for launching cryptocurrency-native projects, such as BRC-20 inscriptions and Decentralized Physical Infrastructure Networks (DePIN).

2. Importance of Tokens

With the advent of the digital age, the adoption of digital financial tools has become widespread (Johnson et al., 2021). However, many people around the world still struggle to access traditional banking services, limiting their growth opportunities (Yao et al., 2021). Digital currencies deployed on consortium or private chains are limited to specific domains. Cryptocurrencies deployed on public chains offer an innovative solution to these issues. They facilitate the free flow of wealth without relying on trusted third parties (Li et al., 2020). This decentralization helps to establish a more inclusive financial system that is not controlled by centralized entities. Cryptocurrencies can provide essential financial support to individuals and businesses in areas with limited access to traditional financial services (Corbet et al., 2018). The decentralization of cryptocurrencies is an important step toward a more inclusive and liberated financial system.

Furthermore, cryptocurrencies serve as a vital coordination mechanism (Enajero et al., 2021). As the influence of decentralized autonomous organizations (DAOs) increases, more people will purchase governance tokens that represent ownership in these organizations, thereby driving up the price of the tokens (Light, 2019). This increase in value not only provides financial benefits to token holders but also strengthens the connections among organizational stakeholders (Jagtiani et al., 2021). This will attract more contributors and promote organizational development.

3. Initial Coin Offering (ICO)

3.1 Introduction to ICO

An ICO, also known as a token sale, is a new type of fundraising mechanism that allows projects to raise funds by issuing digital tokens on a blockchain. This is done by exchanging newly created tokens for highly liquid cryptocurrencies, enabling blockchain startups to execute their community-driven experiments. It is an innovative way to obtain funds and indirectly fiat currency through token exchanges. Investors do not buy equity but exchange their cryptocurrencies for tokens created by software (Lee & Low 2018).

In the evolving field of ICOs, tokens have multiple uses beyond representing equity. Some tokens serve as vouchers, granting holders the right to access specific services or products offered by the project, effectively acting as a pre-sale mechanism. The whitepaper, a comprehensive document detailing the project’s goals, team, technical specifications, and token distribution strategy, is central to the ICO process. During the ICO period, significant capital growth is often driven by speculative fervor rather than the intrinsic value of the project (Li et al. 2021). This has led some startups to achieve valuations of millions of dollars based solely on conceptual whitepapers, akin to the dot-com bubble era. This speculative environment inevitably leads to market corrections, posing risks to investors, especially those entering high-valuation markets (Li et al. 2020).

While ICOs offer a promising fundraising avenue in the digital age, they also come with inherent risks and challenges (Şarkaya et al. 2019). Unfortunately, the allure of quick capital accumulation in the ICO space attracts bad actors. Investors, often driven by FOMO (fear of missing out), may sometimes forgo rigorous due diligence, making them susceptible to well-orchestrated scams (Shehu et al. 2023). Copycat whitepapers, fake project websites, and “exit scams” where founders disappear after raising funds highlight the need for thorough project evaluation. Engaging in the ICO space requires understanding its regulatory ambiguity, as different countries adopt varied approaches (Oliveira et al. 2021). While jurisdictions like Switzerland have taken a more lenient stance, others like China have imposed stringent bans. This regulatory diversity, coupled with evolving regulatory perspectives, necessitates that project initiators and investors familiarize themselves with the rules. Furthermore, the value proposition of these tokens depends on a single demand period, which may limit fundraising potential compared to traditional multi-round equity financing mechanisms (Sousa et al. 2021). A comprehensive understanding of its dynamics, along with appropriate regulatory frameworks, is crucial for safeguarding investor interests and fully realizing its potential.

3.2 Key Milestones of ICO

The ICO concept originated with the emergence of Mastercoin. Its popularity surged after the Ethereum network launched in 2015. Table 1 shows the key milestones of ICOs (Zheng et al. 2020).

Table 1: Key milestones in ICO development

Throughout the development of ICOs, many cases like Tezos, EOS, and Filecoin successfully raised substantial funds. However, many projects failed for various reasons, providing valuable lessons for investors and regulators (Lee et al. 2018).

3.3 Comparison With Initial Public Offering (IPO)

In the stock market, an IPO is when a company publicly lists its shares on a stock exchange for the first time, aiming to raise capital by exchanging ownership in the company (Lee et al. 2021).

ICOs and IPOs represent fundamentally different paradigms in capital financing, each with its unique advantages and challenges. Blockchain-based ICOs offer a fast and decentralized financing mechanism, allowing projects to raise capital in a significantly shorter time frame compared to the traditional IPO process. This rapid ICO method bypasses complex regulatory entanglements and intermediaries, democratizing investment opportunities, breaking down geographical barriers, and welcoming a diverse group of investors. Conversely, IPOs provide a more structured but lengthy financing route through stringent audits, regulatory compliance, and partnerships with established financial institutions. The dichotomy between ICOs and IPOs highlights the trade-off between speed and decentralization versus strict regulation and stability, with the choice depending on the investor’s risk tolerance, goals, and familiarity with the evolving cryptocurrency landscape.

Shareholders in an IPO have voting rights on company matters or may receive dividends. The purpose of an IPO is to raise capital by exchanging ownership in the company. However, ICO participants typically do not share profits. Their potential returns are usually tied to the appreciation or utility of the token within the project’s ecosystem.

IPOs are generally limited to institutional investors or those with significant capital in the early stages. ICOs democratize this process, allowing anyone with internet access and some cryptocurrency to participate. Table 2 summarizes the comparison between ICOs and IPOs.

Table 2: Comparison of ICO and IPO

3.4 Further Developments: IDO and IEO

While ICOs were groundbreaking, they faced challenges in terms of regulation and investor protection. This led to the emergence of Initial Exchange Offerings (IEOs) and Initial Decentralized Exchange Offerings (IDOs), which offer similar fundraising opportunities but with fewer regulatory restrictions, higher decentralization, and better due diligence.

In 2017, regulatory bodies in various countries began scrutinizing ICOs more closely. The U.S. Securities and Exchange Commission (SEC), in particular, stated that some ICOs could be considered securities offerings, requiring compliance with relevant regulations. Additionally, countries like China and South Korea outright banned ICO activities. The rise in ICO activities also led to an increase in fraud schemes and scams. Many projects vanished after raising significant funds, causing substantial losses for investors. The popularity of ICOs waned over time.

IEOs, unlike ICOs, are hosted by cryptocurrency exchanges. This provides higher trust and security for investors because the exchanges perform initial reviews and screenings of the projects. Furthermore, tokens are usually listed on the exchange immediately after the IEO ends, ensuring liquidity for investors. Binance launched Binance Launchpad to provide a more structured and secure platform for projects to raise funds. Endorsement from reputable exchanges adds more credibility to the projects. The success of Binance Launchpad prompted other major exchanges to launch their own IEO platforms. This shift marks a transition from the decentralized ICO model to a more centralized and potentially safer IEO model. With support from well-known exchanges, investors feel more confident participating in IEOs, knowing that the projects have undergone some scrutiny.

In contrast, IDOs involve token sales on decentralized exchanges (DEXs), offering even higher decentralization than IEOs. This allows project teams to raise funds more quickly and flexibly in the IDO model. This method combines the decentralization spirit of ICOs with the structured approach of IEOs. Conducting token sales through IDOs means projects can bypass the often stringent listing standards of centralized exchanges. Additionally, DEXs provide immediate liquidity for project tokens. While ICOs revolutionized fundraising, the importance of smart contract security cannot be overlooked. The market’s evolution towards IEOs and IDOs reflects the industry’s adaptability and continuous efforts to balance innovation with security. As the cryptocurrency sector matures, global regulators are striving to keep pace. The transition from ICOs to IEOs and IDOs can be seen as a response to this ever-changing regulatory landscape, offering more protection to investors while fostering innovation.

4. Airdrops

The concept of airdrops dates back to the early days of cryptocurrency when developers would distribute tokens to holders of specific tokens or wallets meeting certain criteria. The term “airdrop” was coined because it resembled something dropping from the sky, requiring no effort from the recipient. The first notable airdrop occurred in 2011 when Litecoin was distributed for free to Bitcoin holders.

Airdrops are a marketing strategy used in the cryptocurrency space to distribute tokens for free or at minimal cost to a large number of wallet addresses. Various protocols use this method for fair token distribution, building decentralized communities, and sometimes incentivizing users to interact with the protocol. A classic example is the story between UniSwap and SushiSwap. SushiSwap, created as a fork of Uniswap, introduced the SUSHI token to provide additional rewards to liquidity providers. This strategy successfully attracted liquidity providers from Uniswap to SushiSwap by rewarding them with SUSHI tokens. To maintain its market position, Uniswap launched its governance token UNI in response to SushiSwap’s strategy. UNI tokens were distributed to liquidity providers and users who had previously conducted transactions on the platform. This event was a significant milestone in the DeFi space and airdrop history, showcasing how protocols can attract and reward users through strategic airdrops.

The core advantage of airdrops lies in their cost-effectiveness in quickly and sustainably realizing ideas. At the beginning of Web3+ projects, users spend time and resources participating in protocol testing without any compensation. Protocols improve their products based on user feedback before seeking funding. Investors identify promising protocols through due diligence. Once these protocols receive funding, they reward early users through token airdrops. These early users can actively participate in DAO governance or exchange these tokens for other cryptocurrencies. Users who receive tokens are more likely to use the service, provide feedback, and support the protocol. Entrepreneurs and investors dedicated to advancing the internet support these blockchain-based solutions, coordinating all stakeholders at minimal cost. Web3+ moves away from relying on Web 2.0 giants to initiate change and directly competes with Web 2.0 companies (Zheng and Lee 2023).

Airdrops are crucial for generating excitement and publicity, attracting new users to platforms. When airdrops are distributed, media and community members actively promote and research the protocol, giving it significant exposure. Developers cultivate loyalty and stimulate ongoing community engagement by incentivizing and rewarding early supporters. This approach enhances the project’s visibility, attracts a broader user base, and ensures decentralized token distribution, reducing the risk of concentration by a few.

However, airdrops also have drawbacks. Users holding large amounts of airdropped tokens may manipulate the market or sell them off at low prices. Users may create multiple wallets to receive more airdrops, diluting the intended benefits. Additionally, resources used for airdrops could be allocated to other development or marketing activities. Airdrops can be challenging in uncertain regulatory environments. If classified as securities, they may need to comply with stringent regulatory requirements. Therefore, projects must understand the current regulatory landscape and ensure compliance to avoid legal issues. The allocation amount can also be a double-edged sword. Insufficient airdrop rewards may cause dissatisfaction among community members. On the other hand, excessive allocation may dilute the token’s value, negatively affecting its price and diminishing investor enthusiasm. This instability can be exacerbated if many recipients decide to sell their tokens simultaneously. These drawbacks were evident in recent zkSync and LayerZero airdrop allocations. To mitigate this, projects can implement well-planned airdrops with clear guidelines and lock-up periods to curb sudden value dilution. The structure and release of airdrops can significantly influence participant behavior. Poorly designed airdrops may foster a short-term mindset among holders, potentially jeopardizing the project’s overall goals. Ensuring that airdrop incentives resonate with the project’s long-term vision is crucial for promoting sustained growth and development.

Industry builders can refer to the design standards in Table 3 when creating tokenomics, and investors can consider these standards when deciding whether to hold tokens long-term.

Airdrop Design Standards

5. Alternative Cryptocurrency Funding Mechanisms

Inscription BRC-20 and Decentralized Physical Infrastructure Network (DePIN) are two innovative funding mechanisms.

Bitcoin is typically viewed as a store of value, whereas Ethereum is seen as an innovative ecosystem for creating decentralized applications. However, interest in creating the Bitcoin ecosystem has been growing with the introduction of the Ordinals protocol by a core member of the Bitcoin community, Casey (2023).

A satoshi is the smallest unit of Bitcoin, equivalent to one hundred millionth of a Bitcoin. The Ordinal protocol assigns a unique ordinal number to each satoshi based on the order of mining. This ordinal number remains unchanged throughout any transfer of the satoshi, making each satoshi uniquely non-fungible. Inscriptions are the core of the Ordinals protocol, allowing information to be inscribed on individual satoshis. Some consider inscribed satoshis to be unique digital artifacts. Ordinals give satoshis non-fungible characteristics, while inscriptions add unique information to these satoshis, similar to painting on a blank canvas. Combining these two features creates a new NFT standard for the Bitcoin ecosystem.

Inspired by ERC-20 tokens and the Ordinal protocol, Twitter user @domodata created a new fungible token standard, BRC-20. It uses JSON data from ordinal inscriptions for token contract deployment and the minting and transfer process. BRC-20 tokens are deployed on a first-come, first-served basis. Once a BRC-20 token is deployed, tokens of the same name cannot be deployed again. Although @domodata classified BRC-20 as a social experiment, the standard has been widely adopted with promotion from community members and support from centralized exchanges and Bitcoin miners.

Venture capitalists acquire large amounts of tokens at very low prices during private placements. They leverage their reputation to back protocols and present compelling narratives to attract retail investors. Unfortunately, these retail investors often become liquidity providers when venture capitalists sell their tokens. Retail investors are weary of this unfair mechanism. The emergence of BRC-20 offers a chance for fair distribution. There are no private placements for venture capitalists or angel investors. Everyone has an equal opportunity to obtain tokens through minting. During the minting activity, investors pay gas fees to mint tokens. There is no cap on how many tokens each investor can mint. This mechanism distributes tokens fairly and decentralizedly. Token holders are incentivized to spontaneously promote and support the protocol. When using the BRC-20 standard, there is strong consensus among community members because they have equal opportunities to participate in minting. If venture capitalists want BRC-20 tokens, they must either mint them or buy them on the secondary market. It is worth noting that many successful BRC-20 tokens have strong community atmospheres, with some even incorporating meme culture. Meme coins play an important role in the cryptocurrency ecosystem. The current price of BRC-20 tokens is mainly supported by consensus within the cryptocurrency community and meme culture. Intrinsic value refers to the discounted value of cash flows generated over the life cycle of a product or business; thus, most BRC-20 tokens lack intrinsic value. However, the psychological value of BRC-20 tokens is determined by the subjective feelings of the holders, similar to the emotional value of other collectibles or pets. Since BRC-20 is a fungible token standard, its liquidity is better than that of NFTs. On the other hand, some BRC-20 tokens have specific utility, such as being used as gas fees or admission tickets for token launch platforms.

Following the success of BRC-20, many other token standards have emerged in the Bitcoin system and other blockchains, such as ARC-20, Rune, BRC-420, and SRC-20. These innovative token standards originating from inscriptions are worth further research and development. These new token standards provide an inclusive financial ecosystem with improved features, ensuring equal opportunities for everyone with internet access to participate in fundraising.

Another increasingly popular track is the Decentralized Physical Infrastructure Network (DePIN). The emergence of DePIN represents a new paradigm that leverages blockchain technology to facilitate and manage distributed physical infrastructure systems. DePIN aims to address the challenges of deploying and managing physical infrastructure, which are usually dominated by large companies due to the need for significant capital and complex logistics.

IoTex (2021) first proposed the concept of DePIN, calling it MachineFi, to merge machines and decentralized finance (DeFi) to utilize data, events, and tasks driven by machines. Messari introduced the term “DePIN” in its 2022 report based on a Twitter poll.

At the beginning of the protocol, DePIN uses tokens or potential airdrops to incentivize users to participate in ecosystem building, attracting tech-savvy developers to provide more cost-effective products. As more users use the products or services, the protocol’s revenue increases, which can be used for market capitalization management and further marketing, giving back to both the demand and supply sides, incentivizing more participants, and attracting market attention, creating a thriving ecosystem. During a bull market, DePIN will generate a positive flywheel effect. By implementing incentive mechanisms, DePIN networks can generate initial momentum to compete with established Web2 companies and achieve widespread adoption (Sami 2023). DePIN is an important connection between the virtual Web3+ and the real world, effectively promoting data security, coordinating idle resources, and improving our lives while allowing more people to see the practical value of cryptocurrencies. This is the first time cryptocurrencies are used to develop real-world physical infrastructure.

Although BRC-20 and DePIN are innovative cryptocurrency funding strategies, they have not changed the speculative atmosphere of cryptocurrencies. During a market shift from a bull market to a bear market, many BRC-20 tokens have no trading volume, and DePIN track tokens tend to zero. How to better leverage tokens to empower organizations and create long-term, sustainable distribution mechanisms is a key area for cryptocurrency entrepreneurs to consider and practice. Only in this way can we avoid wasting the once-in-a-century funding method created by Satoshi Nakamoto. Otherwise, the cryptocurrency industry will become a new type of casino and fail to develop further.

6. Summary

The evolution of cryptocurrency financing, powered by blockchain technology, has ushered in an era that challenges traditional financial paradigms. This democratization of financing redefines the essence of value exchange and trust, expanding access to global investment opportunities. However, this profound shift also brings challenges, particularly regulatory ambiguity and potential fraudulent activities. The dynamic nature of the cryptocurrency ecosystem, evidenced by its adaptability and innovations such as ICOs, IEOs, and strategic airdrops, is a testament to its resilience and potential.

Facilitating financing is one of the core functions of cryptocurrency. Compared to traditional finance, it operates more efficiently and inclusively. The inclusivity of cryptocurrency in financing activities is significant. It provides more fundraising opportunities and exposure, lowering the threshold for investors to fund potentially world-changing projects. When considering how to make the understanding and use of cryptocurrency for fundraising more widespread, protecting investors and reducing fraud risks without stifling innovation is a direction that policymakers, industry groups, scholars, and project owners need to consider and work towards together.

Last but not least, due to the permissionless nature of public blockchains, anyone interested in financing through cryptocurrency can issue tokens at a relatively low cost. If a project fails, the entrepreneur is likely to start another project. Statistics show that 92% of blockchain projects cease operations within a year of launch. In contrast, the IPO application process is more difficult, and entrepreneurs in the traditional market have more incentive to keep their projects running. Therefore, investors should carefully evaluate the risks of cryptocurrency investments.

Disclaimer：

1. This article is reprinted from [Medium]. Forward the Original Title‘加密货币革命：重构现代金融的融资策略’. All copyrights belong to the original author [Jesse Zheng、Willie Shi 、Yue Wang、李国权]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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